If three large security firms had the majority market share in a city, and a startup security firm tried to compete (perhaps on a single street or block), what’s to stop the larger firms from declaring the smaller startup an outlaw and arresting or killing them? The startup must negotiate with the other surrounding security companies as to which arbitration venue to settle disagreements. If the larger companies refuse to negotiate and refuse to select a venue, then how can the new security firm establish any market share? If any of the new customers or the guards violate a rule of the larger corporations, then the megacorp will just declare the perpetrator to be an outlaw and won’t bother with arbitration.

A present-day analogy is Muslims trying to enforce Sharia law. The larger (monopoly) security (police) will never negotiate or arbitrate with the smaller force, and instead just label them terrorists.

How can a security startup carve market share when there are three larger competitors?

How about limited partnerships? Personal bankruptcy? The real difference between limited liability and a contractual alternative seem pretty small, both in theory and in practice. I’m not a legal scholar, but I’m not aware of any cases where limited liability protections actually prevented some litigant from collecting damages.

There are strong dis-economies of scale for policing. Nobel prize winning economist Elinor Ostrom found larger police departments are less efficient . So your scenario, of only three firms, is unlikely except for small towns.

Also there is an incentive for the cartel members to cheat the cartel, and secretly go soft on and negotiate with the startup security firm. This is a like a public goods problem. Sure all members of the cartel benefit when they block the start up, but individually they have an incentive to avoid the cost of fighting the startup, and the costs of not collecting restitution form startup when they have conflicts with the startups customers. So individually each firm in the cartel has an incentive to secretly negotiate with the startup security firm.

Maybe if there are only three firms in an area they could bar stratups since with so few they could likely overcome the public good challenge. However, if the the cartel service gets too bad, firms in neighboring areas might move in and seek out opportunities for customers.

I don’t see where any of the security firms get the idea that they can arbitrarily outlaw another person or group on any pretext. These are groups that seek to minimize conflict and resolve disputes primarily through negotiation, keeping their customers safe for the minimum expenditure of money. Low intensity warfare does not really satisfy that criteria. They may, of course, decide to act like a criminal gang or the state (but I repeat myself) and decide they’re going to “take over” an area, and then they would have to be resisted with force, just like any other violent gang. But at that point, they no longer resemble security firms, and there is no loophole in the voluntary order that grants legitimacy to such an action.

This is technically true, but I cannot imagine a society of sellers and lenders in their right minds agreeing to this after all the shenanigans that corporations have perpetrated up to the present day, especially when other actors in the market would be willing to do business without such an artificial handicap on their reputations. (After all, if they really wished to show good faith, they would accept full responsibility for their actions without limitation. And since we are talking about a completely different court system, frivolous lawsuits would not be the excuse that they are now.) Those who artificially handicap themselves in a free market end up losing in the long run.

I chose 3 because that is what most markets support: 3-4 major competitors. The number of competitors isn’t important right now. I’m not accusing the established corporations of criminality; I’m just saying they would have rules established already by paying customers, and venues of arbitration pre-determined with their competitors. If a group such as the Black Panthers decides to start their own security, these larger corporations would likely declare them criminals, because they could cut into their profit margins. They may refuse to establish arbitration venues, and if there is any conflict between a Black Panther customer and Blackwater Inc. customer, then the larger corporation has no recourse but through violence, and they may justify their actions after the fact as fighting crime. Yes, the 3rd competitor will always try to attract more customers, but how will they react to a new entrant in the market? Security is unlike other markets, because it requires a modicum of cooperation among competitors. Whereas you can directly sell a phone to a customer and bypass a competitor, for security, it requires a pre-established relationship and venue of arbitration unless you are willing to fight to the last man, which will quickly put you out of business.

Corporations would not receive a stamped certificate from a secretary of state, but there will still be de facto corporations in act and deed. I wasn’t intending to argue semantics. Plus what Conza said. People are still willing to invest in Russia and Ukraine even though they have a shitty court system and 0 recourse.

Also consider street gangs. They have every bit as much finances and accounting and marketing as corporations, yet they do not have a certificate of good standing from their friendly neighborhood bureaucrat.